The upward sloping AS curve is described by the equation: =[^*/^*+1+^e]

Part A: Define the following components and describe how they contribute to the Aggregate Supply curve:

P':

: :

:

:

^e:

Part B: If Y=Y*, how would you expect prices to change from one period to the next?

With the Aggregate Supply equation shown at the beginning of this question, is it possible for prices to fall from one period to another? Why or why not?

Part C: Current output is $42,000. Potential output is $40,000. Expected inflation is 3%. The responsiveness of wage growth to a change in unemployment is 0.5. The responsiveness of output to unemployment is 1.5. The current aggregate price index is $200.What would we expect the price index to be in the next period? What percentage change is this? Is the change higher or lower than expected inflation?